A landmark in corporate welfare

ByMark LangeJuly 18, 2007

San Francisco
— Medicare Part D makes it easier for America's elderly to buy prescription drugs. It also gives drug companies a free ride on the backs of the next generation.

Social Security and other entitlements already threaten the nation's fiscal health. So why would Congress make Medicare Part D a landmark in corporate welfare? It may be a financial debacle, but it's a lobbyist's dream. Part D is a multibillion-dollar entitlement for the pharmaceutical industry that taxpayers will be underwriting for the rest of their lives, or until Congress fixes it, whichever comes first.

The White House and Congress claimed the private structure of the program would lead to lower drug prices. In fact, since the program began last year, the opposite has happened, thanks to the lobbying wizards of K Street. A fragmented band of more than 1,400 Part D insurance plans has had little negotiating power with the drug companies. Nor do those plans have much reason to bargain: Part D subsidizes patients on extended and expensive medication regimes at 80 percent.

Most remarkably the bill that Congress pushed through in 2003 didn't let the government negotiate drug prices. Why? Because the US Department of Health and Human Services (HHS) got no authority to define the "formulary" list of drugs for which Medicare will pay. Absent a credible threat to drop from that list any overpriced drugs that have branded alternatives – which the vast majority has – the government lost its negotiating stick.

Surprise! No price competition. So drug companies were able to raise rates for brand-name medications (that have comparable alternatives, but for which there are no generics) at twice the rate of inflation in the first six months of the program. And together, the five largest drug firms enjoyed a 45 percent increase in profits over the prior year.

This year, prices under Medicare private insurance plans for 10 of the most prescribed brand-name drugs (that have comparable alternatives) shot up an average of 6.8 percent in just four months.

The drug company comrades-in-armchairs should compete for their margins like everybody else, not be propped up by nonnegotiable government overpayments. Instead, analysts estimate that this congressionally sanctioned price support program, unmolested by market forces, will result in at least $30 billion in windfalls to drug companies in the next decade.

When the bill was being debated, taxpayers were told the program would cost $400 billion. Today, realistic estimates put the figure at more than $1 trillion. The big drug companies, of course, love this. All those multiyear investments in lobbying have paid off – allowing them to use your tax dollars to boost their earnings.

In January, under public pressure, the House voted to "require the Secretary of Health and Human Services to negotiate lower covered part D drug prices." The press called that progress. But in the lobbyist-legislated fine print, HHS was still barred from establishing a formulary list. So the bipartisan Congressional Budget Office and Medicare's own actuaries concluded the House bill would have no effect on federal spending. And the version now ostensibly pending in the Senate is an even more dazzling example of the lobbyist's art. It merely authorizes – rather than requires – the secretary of HHS to negotiate for lower drug prices.

If you pay taxes, have an older relative, or have any plans to be one, check out the top 20 list of congressional recipients of pharmaceutical lobbying largess in the last election, compiled by the Center for Responsive Politics (www.opensecrets.org). You'll see some familiar names: Sens. Orrin Hatch, Edward Kennedy, Joseph Lieberman, and Hillary Clinton.

During your next lunch break, call their offices. Ask their staffers why a failure to create real price competition in Medicare Part D should cost taxpayers and coddle drug companies. Or ask them how long the program can survive centrally planned profiteering. And you should suggest to them the following reforms:

First, sell medicines used by Medicaid "dual-eligible" patients to Part D plans at the lower Medicaid rates. Second, let congressional watchdogs monitor prices paid by Part D plans versus Medicaid's best prices (today both price lists are confidential). Third, let Medicare leverage global efficiencies by buying FDA-approved drugs made at FDA-inspected facilities overseas (they're the same pills, made by the same companies, at a fraction of the cost). And finally, fund staffing for the Food and Drug Administration to close its record backlog of more than 850 applications for generics, which typically cost 20 to 70 percent less.

While the lobbyists are paid to make reforms to Part D the legislative equivalent of a child-proof cap, nothing suggested here is really that difficult. Unless you're ready to swallow the idea that everything's negotiable but death, taxes, and drug prices.